Interest rate cut from 4.5 to 3 % [shock]

[morningpaper]

Bank of England just announced 1.5% cut

Can I have a bit of a whinge? While I think this cut is the right thing to do I am just fed up that those woth savings (and yes this includes me) will be penalised?

At the moment it seems like people who have tried to be responsible financially have been hit - our savings are reducing in value, our pensions and ISA's have had a hammering etc.

Before I get flamed for having money to save I would like to point out the we live in a pretty thrifty way to enable us to save - small house and mortgage, unflash car, uk holidays etc. I realise how lucky to earn enough between us to be able to save anything at all but I'm still a bit annoyed that we're being punished for it.

Them's the breaks I guess.

Soooo, does this mean I should take all the money I have in savings accounts paying crap interest and fling it into the mortgage?!? What's the amount you're supposed to keep back in case of emergencies - 3 months outgoings? or is it 6 months? Am seriously thinking about doing this (not that it's a lot of money, but I can probably round up a few thousand if I check what we've got in what account).

What do 'they' know is coming our way in the next few months to make this necessary? Scary stuff.

I don't think anyone really know anything

they are just pressing random buttons and seeing what happens

the nationwide have just launched a savings account with over 6% interest on

But surely with a dearth of savers, the attractive savings rates will remain ...

Now that we, as taxpayers, are part owners in the banks, I think there is a big case that they will be compelled (petition your MPs) to pass these savings on to the customers without penalising them on the other hand with large fees and added costs..

Or am I just being too optimistic...and still in an Obama-moon stage..

"Now that we, as taxpayers, are part owners in the banks, I think there is a big case that they will be compelled (petition your MPs) to pass these savings on to the customers without penalising them on the other hand with large fees and added costs.."

This isn't my area of knowledge, but I don't understand why this couldn't have been stipulated as a condition of the bail-out - that IR cuts had to be passed on to a guaranteed extent. Anyone in the banking/finance field any thoughts on that?

All this is quite apart from the wisdom of potentially re-inflating a debt/house price bubble...

remember interest rates are 1% in the States and they are buggered

it's a sign of how bad things really are that the BofE have made such a huge cut

it's to try and get us out of recession faster...

elkie, yes we do... I have stayed with them because they always answer the phone promptly and properly and their customer service is so good! No other reason.

DaDaDa: the reason is that banks fund themselves (and the mortages they provide)very much in part through the wholesale market, i.e. from other financial institutions.

The cost of funding themselves using the wholesale markets is governed by the cost of borrowing from other banks - LIBOR, or the London Interbank Offer Rate. Traditionally this has tracked the base rate very closely so when the base rate has fallen, LIBOR has fallen by an equivalent amount. Unfortunately, one of the key reasons for the contraction in credit has been the growing disconnect between LIBOR and the base rate as banks have become increasingly concerned about lending money to each other. Over the last 3-6 months reducing the base rate in itself hasn't actually reduced LIBOR much.

Very simply, traditionally if Bank A needed wholesale funds it went to the wholesale market and the market said "Sure mate, no problem, you're a well known institution, I reckon I can trust you to repay that and so I'll just charge you a nominal fee". Unfortunately over the last 3-6 months when Bank A has gone back to the wholesale market its got a response along the lines of "Hmmmm, not quite sure how much of that sub-prime crap you've got and just how stupid the other investments you made are. Tell you what, I'll lend you a bit but only at an absurdly inflated rate to reflect that."

So even though the base rate falls, with liquidity remaining low and credit risk remaining high, LIBOR doesn't follow suit and so the banks cost of borrowing has remained high. Hence the fact that they arguably can't pass on the full whack of the rate cut. Even if LIBOR falls slightly, they're also going to be more inclined to keep their lending rates where they are to try and make a greater margin and recoup some of the vast sums of money they've lost.

To the extent that LIBOR doesn't come down as a result of the base rate cut, you can't actually force banks to pass it on. Well, technically you can, but then you risk forcing banks to provide capital at a lower cost than they're borrowing it at which means (fairly obviously) they go bust. You could, I guess, try to 'fix' LIBOR but that would require pretty serious market intervention and probably a collapse in the wholesale markets.

expect it'll make house sellers less inclined to drop asking prices....for a bit!

cestlavie - that was a really useful explanation for something i've been wondering about. thank you

Thanks cestlavie. I guess 'pretty serious market intervention' would be beyond the pale...oh.... hang on.

It's a total house of cards isn't it? I think BoE and the government are delaying the inevitable.

Hmmm. Yes, I think the perception of market intervention has certainly changed in recent months...! That being said, when you start fixing markets you're in to a whole new debacle which quite frankly I wouldn't trust a band of Nobel prize winning economists to successfully engineer, let alone the current band of chimps who oversee the financial system.

do you think this'll give the housing market a boost?
typically, we have seen house of our DREAMS, but tis currently in negotations with a potential purchaser (after being on market since April this year - GAH !!!!!!) It's LOVELY

Japan had zero interest rates for many years. And it is only in the last two years or so that they are coming out of that doom and gloom.

wasabipeanut - I have a mortgage, I also have small savings (small being the right word!) and am in a pension scheme. I want my mortgage rate to fall.

Good explanation cestlavie. The financial press is so bad at explaining!

We should also remember that banks that offer their savers high interest rates are effectively funding themselves at higher rates and reducing capacity to reduce their lending rates

CoteDAzur- good point about Japan. I can't imagine that we would deflate for as long: higher propensity to consume over here .....

But I take your point that this isn't the end of the recession. But atleast the MPC have finally got off their bums and realised that the downside risks are much more important that inflationary pressures. Per previous posts you don't need to be called Albert to work that out

On the radio they were saying that, along with banks not necessarily passing the rate cut to borrowers, they also were not all likely to lower savings rates either as they need to attract savers. Real rates do seem to be quite decoupled from the base rate - except for existing trackers.

Personally we have most of our savings in indexed-linked National Savings, which will never make a fortune but at least shouldn't lose in real terms.

we were set to go and see a property we were fairly interested in seeing, EA just said vendor has put the proce up 125K after hearong about interest rate cut! pmsl

wonder how long sellers will think this is going to have a real effect on HM - 2 weeks?

Dinny we need you on book swap thread.